The Children’s Fitness Tax Credit needs change, not expansion

October 27, 2014

The Children’s Fitness Tax Credit (CFTC) is a federally administered tax credit eligible for families that enroll their children in organized fitness or sports programs.It was recently announced that, this year, the tax credit’s maximum allowance of $500 per child will be expanded to $1,000 per child, and effective from 2015, the tax credit will become refundable[1].

The CFTC’s goal of increasing exercise and activity among children, most would agree, is laudable. However the CFTC is inequitable and there is little evidence to suggest that it is effective in achieving its desired goal. Because of this, the Institute advised a change (not an expansion) to it in Working Paper 18. The Institute believes that it would be more effective to allow accredited organizations to deduct an equivalent of the tax benefit from their fees as opposed to having individuals claim the CFTC on their tax return.

The Institute noted that the credit dis-proportionately benefits higher income earners. While making the tax credit refundable should help those with low incomes, in order to receive the maximum benefit of the credit (15 percent of $1,000 = $150), a family would have to spend at least $850 a year on organized physical activity (PA) programs, per child. Families in the bottom income quartile are less likely to have a child enrolled in an organized PA program, be aware of the credit, and be willing to spend $850 on organized PA activities,[2] relative to families in the top income quartile. Given this, it is improbable that low income earners are going to benefit much from the recent expansion compared to their higher earning counterparts.

Moreover, studies have suggested that the credit may not be effective in achieving its goal of promoting physical activity among youth. In a survey of parents who claimed the CFTC in 2007, only 16 percent credited it to increasing their child’s participation in organized PA;[3] the majority of those who claimed the CFTC would have enrolled their child in the organized PA regardless of whether they received the tax credit or not. Furthermore, because people discount the value of future benefits, having to wait until filing an annual tax return before receiving the benefit reduces the potential impact of the tax credit. Therefore, if the Canadian government is adamant on maintaining a program like the CFTC, as per the Institute’s previous recommendation, it should instead allow accredited organizations to deduct an equivalent of the tax benefit directly from their fees, removing the possibility that people discount the benefit.

Aside from the inequitable and ineffective design of the CFTC, the Institute believes an expansion of the CFTC is a poor use of the federal surplus. The Institute previously advocated for the upcoming federal surplus to be put toward policies designed at generating long-term benefits for Canada’s prosperity. Furthermore, there are large provincial deficits which should also be a federal concern and make the federal government hesitant in applying such tax breaks - a point elaborated upon by the Carleton University economist, Frances Woolley. In short, there is an opportunity cost to expanding a tax credit such as the CFTC[4].

The Institute urges both the federal and provincial government to follow a policy of ‘Smart Taxation’, outlined in Working Paper 18, whereby governments pursue a taxation policy which is equitable, efficient, and effective. The CFTC is neither equitable nor effective, and the Institute is opposed to any similar expansions.

[1] Those who had previously been ineligible for the credit because they already received more in tax-transfers than they paid in taxes will now be able to receive the credit.

[2] 63% of Canadian parents in the lowest income quartile spend less than $100 or more on their children’s sport and PA – John C. Spence et al., “Non-refundable tax credits are an inequitable policy instrument for promoting physical activity among Canadian children,” Canadian Journal of Public Health, Vol. 103, No. 3, 2012.

[3] John C. Spence et al., “Uptake and effectiveness of the Children’s Fitness Tax Credit in Canada: the rich get richer,” BMC Public Health, 2010.

[4] The Parliamentary Budget Officer estimates the cost of the CFTC to be between $25 and $35 million a year. The Parliamentary Budget Officer, “Economic and Fiscal Outlook Update 2014,” 2014.